>> now on booktv thomas stanton argues the main difference between companies that successfully made it through the 2008 financial crisis and those that didn't was the willingness of upper management to listen to feedback before making decisions. this is about an hour and 15 minutes. >> good afternoon welcome to the cato institute. i am the director of financial regulations here at cato and i'm also honored to serve as the moderator for today's book form. when reading press coverage of the financial crisis one possibly constant we comes across phrases such as the bank said this in the bank said that. there is no one response to the financial crisis or to the events that preceded it. different firms took different

approaches. while several ceos and their boards made poor decisions that eventually led to their failure, others made good decisions, prudent decisions and sometimes brilliant decisions that not only save their firms but also about these firms to game gain a share and come out of the crisis stronger than ever. while in my own writings i have tended to place considerable emphasis on the poor public policy choices that caused this crisis is important to keep in mind that not everything responded to these policies in the same manner. consider from him at the role of monetary policy leading up to the crisis. the federal reserve engendered a yield curve by firms with a strong incentive to borrow short and lend long. i would say it's an exaggeration that mayor stearns was done in by the extreme mismatch and its assets and liabilities however firms chose a different strategy while facing the same yield curve for instance the book discusses the strategy of goldman while less probably the time ended up being far more

stable part of the book discusses today -- "why some firms thrive while others fail" governance and management lessons from the crisis is fundamentally why some firms make correct decisions while others did not and it's particularly appropriate that today's book form is being held in the hyatt auditorium and although the author does not cite hayek the court issue identifies the book is one essential to hayek's work that is the use of knowledge that the risk of overgeneralization separating successful firms from the failures for how well management utilized his first information within both their firms and the marketplace. firms that failed largely were those where management was insulated independent and exclusively on their own knowledge. firms that succeeded with those for management harness the information within their term by creating effective feedback mechanisms. theauther, thomas stanton will provide us with exactly how any discussion of which firms were able to utilize this information as knowledge dispersed within the firm. let me go back and remember when i first came to washington after

a doctorate in one of first books i was exposed to as tom's book he wrote in 1991 title the state of risk for the government-sponsored enterprise -- clearly tom was years ahead of his time and unfortunately his predictions came out to be all too accurate. he has had a long track record as one of the foremost forecasters at the state of the financial services industry in terms of policy. when he is not writing books he spends his time as a fellow at the center for advanced governmental studies at the johns hopkins university. tom also served as the financial crisis and great commission and well in my opinion very few things i would disagree with the commission's findings one thing that i know for certain is the commission's report and work is far stronger because of thompson colman. the book here today is also informed largely by tom's experience on the commission staff. we are also very fortunate to have with us elex to offer his thoughts on the book. currently alex is a fellow at the american enterprise

institute. i first ifrs got to know alex got to know alex at that gate ago when he was president and chief operating officer of the federal homeland think the chicago a position he held from 19,912,004 and i have always found alex to be one of the most insightful -- so with that i'm going to turn the podium over to tom. >> thanks very much mark and good afternoon. i think it's afternoon. it's a real pleasure to join each day the cato institute. i'm extremely grateful to cato and i want to express my thanks go years ago i wrote a monograph that raise questions about the financial soundness of fannie mae and freddie mac and then i wrote the book that mark alluded to, "a state of risk," will government-sponsored enterprises be the next financial crisis? fannie mae and freddie did not like my monograph and they did not like my book. >> they did not like you.

[laughter] sees suddenly it became a little chilly and kathryn england who at that time was the head of regulatory affairs at cato invited me in out of the cold and said, why don't you present what you have found and what is happening. i came to a luncheon meeting such is this. there were a number of senior federal officials who had simply taken goc's for granted and suddenly we were launched on trying at least to sound the alarm and to reform the structure and the oversight of the sponsored enterprises so i'm very grateful to cato. unfortunately as peter wallison of aei has pointed out, our largest financial institutions today there like government-sponsored enterprises. they benefit from the belief that government will bail out there debt holders. now shareholders, they like

high-risk bets particularly high leverage because they get the high returns from those high risks, at least until something goes wrong. by contrast, debt holders have traditionally been a force for moderation in the marketplace because they only get a fixed rate of interest whatever the debt obligation promises and when a the company starts to take more risk their disadvantage. but implicit government backing of the dead of our largest financial institutions means that this market discipline has suddenly been undermined. so today i want to talk about my new book, why some firms thrive while others fail and this focuses on my work. we study internal documents. i can't tell you how many from financial institutions and the regulators interviewed ceos,

risk officers, bankers, traders, regulators, policymakers and a number of other people to try to understand from everybody's perspective putting it all together one went on here. and in 2010 we were still in a stage when people on wall street and in the financial system were in shock and were pretty ready to tell us their story. i don't need to tell you particularly looking at the younger age of this audience that the financial crisis was immensely expensive with pervasive effects in the country. maybe 10 million households are going to lose their homes to foreclosure. house prices declined to the point where almost a quarter of homes are worth less than the mortgages on the property. the unemployment rate doubled. millions of people lost their jobs. the median household wealth filled by trillions of dollars in property rates rose to its

highest level in 17 years and graduating students have a lot harder time finding work than ever before. much of this damage might have been avoided or at least mitigated by better governance, risk management and better management generally in both the public and private sectors. perhaps the most important task before us and what i tried to do in writing this book is to understand the expensive lessons of the crisis for our public and private institutions and how we can avoid these mistakes in the future. in the book i try to understand the differences between four major firms that successfully navigated the crisis and eight that failed or required government support to stay afloat which in my book -- till i studied jpmorgan chase, goldman sachs, wells fargo and

dominion bank now td bank since the crisis has appeared here in washington on a number of street corners. jpmorgan chase's's stories preparing the company advanced to be strong enough to take advantage of long-term opportunities. goldmans is has the capacity to relate to changes in environment and of course tripping happily over reputation risks. wells is a company with a culture of customer focus and restraint and the keybank provides the simple lesson, if you don't understand it, don't invest in it. each of these firms apply strong governance, good management, operational, but in sand discipline both with different approaches. some of these firms have had serious problems since the crisis and of course jpmorgan chase actually lost in their london office and an event that

revealed poor risk management. the point here is, these firms have successful strategies for weathering the crisis. there is a huge difference between taking a large loss such as morgan recently took and having the company fail. the companies that failed in the crisis didn't just take losses. they went out of business and required massive amounts of taxpayer aid or ended their existence as independent companies. unsuccessful firms included man -- fannie mae and freddie mac, bear stearns, laymen, merrill lynch, citigroup, wachovia, ups, aig, countrywide and wamu. the variations they exhibited similar shortcomings and organization, government and management. many of these institutions have become so unwieldy that they were virtually impossible to

manage as integrated enterprises. while managers may have profited from it can can go -- conglomeration, it is not clear that this massive size benefited mark or the financial system or for firms that failed their shareholders. we forget how large our financial conglomerates actually are. in 2008, citigroup with 350,000 employees and nearly 2500 subsidiaries, was the largest complex financial institution. aig, smaller than most of the major firms, comprised some 223 companies that operated in 130 countries and had 116,000 employees. in my book i try to share with the reader exactly how complex these firms are and the aig -- and remember they are really small compared to our large complex financial institutions,

takes up four pages of fine print and a huge number of organizational boxes. weak governance, compounded organizational shortcomings, overbearing ceos dominating weak boards that failed to uphold the duty of respectfully challenging management to provide feedback and proposed limitations and proposed management initiatives. another characteristic of unsuccessful firms with their pursuit of short-term growth without appropriate regard for risk. in 2005 and 2007 both fannie mae and freddie mac decided to increase their purchases of sub-prime and all to a mortgage is just as home prices peaked and declined. their firms, laymen and wamu, also decided to increase risk around the same time. some firms, countrywide, aig and

city simply continued the blind pursuit of market share without regard to changing market circumstances. so where were the regulators? to say the least, governments actions before the crisis were seriously inadequate to protect against an economic debacle. not unrelated is the fact that the financial insurance and real estate sector was by far the greatest source of campaign contributions to federal candidates and parties contributing almost half a billion dollars in the election cycle 2007/2008 alone. the financial services industry to offense used its clout to lobby for government policies that ultimately hurt rather than benefited major financial firms. it was the way the fannie mae and freddie mac pot for bought for years against more capable supervision to and standards that might save them from making

the bad decisions that destroyed the two companies in 2008. the industry's political strength impeded other supervisory actions as well such is the effort of regulators to try to limit excessive lending concentrations in nontraditional mortgages or commercial real estate. the question then becomes whether from the perspective of organization and management there is any major recommendation that if well implemented what if it allowed more firms to survive? the literature on decision-making in large organizations actually yields an answer. sidney crinkle stein of the tuck school of business at dartmouth and his colleagues analyzed decision-making enlarge organizations. they found that bad decisions required to elements. first, international flawed decision by the ceo or in other influential person made an second a poorly structured decision process that failed to

provide facts and input to correct the mistake. to overcome this good decision-making requires what my but my book called constructive dialogue. if i may borrow eggs ... this phrase, feedback, doubts and dissents need to be seen as offers to rethink a preliminary decision before it potentially causes harm. in the financial sector, successful firms managed to create productive and construct detention between those who want a new deal or to offer certain products and services and those in the firm who are responsible for limiting risk exposures. by creating a respectful exchange of views among these divergent perspectives, successful firms freed themselves to find constructive outcomes that took the best from each point of view instead of simply deciding to do a deal or not. successful firms considered ways to hedge risks or otherwise

reduce exposure from doing video. successful firms created opportunity for constructive dialogue between ceos and their hordes come ceos in and their top management and between revenue producing units and risk officers. the unsuccessful firms precede revenue producing ventures without constructive dialogue for those concerned about risk. my favorite example is a credit officer at fannie mae who went to his boss saying, we are buying these mortgages and we are really paying too much given the amount of risk they contain and the boss said to him, can you tell me why you are the only person in this company who believes in your model? they disregard the risk officers. freddie mac in 2005 fired his ceo as chief risk officer just as the company increased its risk-taking. lehman ceo sidelined in 2007 by

contrast because of the application of constructive dialogue and a robust sense of the risk reward trade-off, successful firms sometimes retained for capital than their competitors and many times were refrained from lucrative but risky types of products and transactions that seem to be making so much money for their competitors. constructive dialogue was ingrained in the company's culture. also, this pattern also applies to nonfinancial firms. my book discusses decision-making and costly mistakes such as the bp gulf oil spill, fatalities of the massive mining company and hospital medical errors. failures in nonfinancial firms showed the same patterns by overbearing or distracted ceos or other such as doctors who make for decisions without obtaining feedback. coulters that emphasize

production without adequate consideration of risk and inapt regulators. ceos of large complex financial institutions need feedback from capable sources. my suggestion here is to apply constructive dialogue to relations between large complex financial institutions and their supervisors. while regulators may not have the expertise available to large complex financial institutions, they are in a position to ask simple questions such as about the amount of capital that a firm has allocated to back the potentially risky activities our weather the firm is lowering standards to meet aggressive goals for growth but the question someone should have asked about chase's london office will is making profits and they could for it took the $5.8 billion loss this year. are you making all of your money because you are the smartest

person in this highly competitive market or are you simply taking more risk than everyone else? feedback from regulators can improve decisions merely by posing the right questions and pursuing the answers. constructive dialogue is a two-way street. feedback isn't worth a lot if it comes from and inapt source. regulators need to be open to input and examiners are engaged in checking the compliance drills without understanding the real risk of the company's business. that there are too many examiners for multiple regulators on-site without a focus on the most important issues or that particular examiners are not open to constructive dialogue. constructive dialogue can improve decision-making all the way around. can help to improve quality of both regulators and the firms they supervise or as ceo at ed meant clark successfully led ge

bank through the crisis argues quayle there must be productive working partnerships between industry and its regulators, enabling both parties to agree in principle on weddings to be done and on the least intrusive way in making it happen. my book cites testimony as shell oil company marvin odum to the deep water horizon commission that was investigating the vp gulf oil spill. he said quote, the industry needs a robust expertly staffed and well-funded regulator that can keep pace with an augment industry's technical expertise. a confident and nimble regulator will be able to establish and enforce the rules of the road to ensure safety without stifling innovation and commercial success. rex tillerson, chairman and ceo of exxonmobil told the deep water horizon commission much the same thing. odum's and tillerson's applied

to the financial sector as well. to improve both are public and private institutions, we need to have higher-quality supervision aimed at improving decision-making in the industry and thus greater economic efficiency. regulators are not always right. rather we need regulators that are capable of offering high-quality feedback to our largest financial institutions so that her constructive tensions with their regulators, firms make improve decisions that take account of long-term sustainability and not merely short-term profits and bonuses. this can free us from some of the sterile debate about whether there is too much regulation or too little. the results of that debate i respectfully suggest are thousands of pages of laws and regulations that are unlikely to

forestall another financial crisis in the future. indeed, government rescues a largely insolvent firms coupled with the substantial compensation that ceos and senior managers have failed firms managed to keep for themselves mean that once the economy returns to a semblance of health come incentives, incentives to take uneconomic risks may be even greater than before. opening constructive dialogue on these issues will not be easy, given the current atmosphere in washington but would seem well worth the effort. thank you. [applause] >> the thanks, tom. alex would like to offer a few comments. >> the thanks very much to mark and cato for giving me the opportunity to comment on tom's very interesting and very useful book. i say that as a practicing

banking executive. overbearing ceo. i was a ceo for about 14 years and i wonder if i was overbearing? surely not. tom, in his book, sites frank knight risk -- and i consider tom seem to be how to address the reality stated thus by knight, uncertainty is one of the fundamental facts of life. it is ineradicable from business decisions. one interpreter expanded on this a little bit. he said, as knight says most business decisions especially strategic ones are there varying degrees steps into the unknown. each of the possible outcomes of a business venture can be

considered to have some probability of occurring for these probabilities are not known to the players or to the decision-makers. to get knight right you have to change that sentence a little bit. these probabilities are not known and cannot be known to the players. indeed, so how some firms thrive while others fail can be thought of this how they deal with such uncertainty and the fact that many things which were considered impossible by many if not most people have a way of nonetheless happening. tom gives us a most valuable exploration of this, trying insightfully from many interviews as has been said with the financial crisis inquiry commission but i would point out

it is not only firms that are in trouble. it is any and all organizations, including governments and central banks dealing with uncertainty and the inability to know what the results of their own actions will be. for example, how should the federal reserve have considered in the early 2000 sit strategy, as mark referred to, of encouraging a boom in housing and trying to cause housing prices to rise in order to produce offsetting the recession? what kind of internal debates in risk management should the federal reserve have had? the personal accounts of discussions and arguments about the riskiness of actions in tom's book is deeply instructive and displays the amount of uncertainty involved in such discussions. it reminds me of my old friend

hyman minsky. tom cites minsky in the book. hyman and i used to have interesting discussions while he was still alive and he told me one day, and i think you never publish the story but he told me this in person. he said look, the economic and financial system is made up of two fundamental types and minsky called them entrepreneurs and bankers. he said now, entrepreneurs are warm, optimistic, energetic, risk loving, self-confident and can leap tall buildings in a single bound and they are successful. they show that they actually can do it. bankers in the minsky world need to be cold, rational, pessimistic, cynical and worried about the risks.

said minsky to me, well they helpful economy is the result of an ongoing dialectic or balance between these two fundamental types. i think we can see a lot of this in tom's book. now, this is underlined by a description and frank knight's risk of uncertainty profit in the entrepreneurial type and knight says most men have an irrationally high confidence in their own good fortune, not the inherent bankers in risk managers, but many people. an irrationally high confidence in their own good fortune and this is doubly true when their personal prowess comes in to recognize when they are betting on themselves. there's little there is little doubt that businessmen represent namely the class of men in whom these things are most strikingly true. these are the out of print or is. they are not the critical and hesitant individuals whom they

would describe as the weak-kneed. the naysayers and what not. but rather those with restless energy, buoyant optimism and large faith in themselves in particular and this is the entrepreneurial type. and, these are exactly the characteristics which allowed the entrepreneurs to achieve great things and also to go broke. this is, this great "in tom's book about the long history of successes is the precursor to a failure. think of what the successful entrepreneur has learned. he has learned that when i have all of these helpers around telling me i can do this, it's too risky and it will never work, and i i do it anyway and i succeed, so how does he look at all these advisers in the entrepreneurs eyes who ought to tell him next time, you can do it.

i mean we have to ask ourselves what happens to minsky's dialectic or balance between the entrepreneur and the banker, which i think it's such a nice way to think about this, when the entrepreneurs take over the banks? and this is the point. when this entrepreneurial type takes over the bank, that is supposed to be the risk-averse, cynical worried about risk type, what do you get? you might get a bubble. and what can you do? then you have to reproduce this dialectic of the entrepreneur and the banker or the optimists and the pessimist or the i can do anything versus the worrier and the focus are on risk. ..

you would have lost of a lot of money. today with the federal reserve manipulation of the bond market. how much times can you be crushed by betting against bonds and make sure they spike upward, they will, how many times have

can you be crushed as many people have been worried about the risk before you give up. we have the problem with when you cry wolf a lot of times and the wolf doesn't come. you lose credibility as a warning device. remember in the great old fable in crying wolf, in the end the wolf does come. in the financial cycles the wolf comes. the problem of creating the internal i did elected equal balance between the entrepreneur and the risk manager comes out nicely in some memoir by louis the xiv, which he called difficulties surrounding kings. he talks about being king and having to confront the number of desires and opportunity and murmurings to which kings are exposed. the force of character, he says, is required to keep also the correct balance between so many

people who striving to make judgment inclined to their side. each one of them applying himself wholely to give an appearance to justice to what he is seeking. that is true. and as tom suggests, one of the things so you to do if '02 going do it right, in any organization is to have the right inner circle around the ceo or the chairman or the leader. what is the nature of the circle? it's a circle who is not impressed by the drama with which the leader leads everybody else. you have to surround yourself by people who love your drama and the great charisma you have created, but who know you well enough to know it's nonsense. you may be good, but you're not that good. they will tell you the truth, and will feel you're inevitable gaps and mistakes and your

inevitable gaps in your own knowledge. that's asking a lot of the human character to build that group like that. but i think that needs to be done. it's one of the most important lessons in the book. now to conclude with the theme that has to be done, which is really a powerful if done but is not easy to do. tom's books show it is can be cone with the examples he cites. and as tom says, this is completely different from, as you just heard him say, thousands of pages of laws and regulations that isn't what will do it. what will do it is building the -- dialectic balance or fundament types of thinking around the inevitable, unavoidable uncertainty faced by all organizations or how to sum it how do we make sound judgment

in the face of uncertainty? >> well, thank you. alex. one of the first things -- tom wanted to comment on -- should i stand or sit. >> whatever makes you comfortable. totally comfortable. [inaudible] why don't i stand so -- [inaudible] >> there's a lot of wisdom in alex'ss discussion and i'm delighted with the way louis xiv. alex mentioned central banks making mistakes. i personally interviewed a number of senior fed officials, some retired, i guess most of them retired at that point who said that when chairman bernanke for whom i have a lot of respect for he and secretary paulson did to deal with a crisis after it occurred, but in spring of 2007, chairman bernanke made a speech and he said this sub prime

crisis, t going to be confined to the housing market. what we found in your interviews was that the economists had all done their calculations within the fed and said, these are small numbers compared to the size of the banking system, the number of sub prime mortgages is small enough, everyone will be fine. the supervisors, the examers, the people that go out and oversee safety and soundness of the bank at the fed they were second class citizens in the feds structure scream weeing have seen the balance sheets, they are highly leveraged, excuse me, they can't take the hint because there was no constructive dialogue or dialectic, as alex would put it, between the -- excuse me, between the economists and the

supervisorrers. chairman bernanke made the optimistic statement without understanding the supervisors had a lot of droibt his knowledge and what he told have foreseen. so what i found in a number of organizations public and private, is what i call -- i don't put it in the book this way, a layer of cork between the top of the organization and the bottom. you can see in the nasa space shuttle disaster with the frontline engineers, both of them incidentally, with the frontline engineer knew there was a problem and somehow the concerns run in to a layer -- excuse me, cork and all of a sudden, these people are not able to get their opinions heard or listened to by senior management. than can be the source of an awful lot of problems, and i think that's the kind of reality this a bank examer should be

looking for rather than all of these formalities that people are insisting on now in terms of dodd-frank. i filed a comment with the fed because they have talked about risk-management and they want to have a new rule for large stiewxes that says your board should have a risk committee, and there should be on the risk committee who knows about risk. [laughter] and i said, yeah, exactly. yeah i said jpmorgan chase had a risk committee and had somebody on the committee that knew about risk they lost $5.4 billion. you don't want formality of risk-management. fannie and freddie had risk-management committees or the responsibility of risk committee. so did layman. what you want is to look at the realities, i have the general counsel of a large successful firm before we were arranging the interview with the ceo,

downloading on me about how awful it was that their regulator was insisting that they have as a more fall risk committee and cothings in a certain formalistic way, they were doing very well, thank you, they were doing well through a decentralized structure and a different way of doing business. my bottom line is, we have to look for the die let tick, we have to look for the quality of the decision-making process. in both our public and institutions, or else we're going to be in trouble and dodd-frank doesn't really do that. >> thank you, tom. and i would say that's, you know, one of the reasons why i maybe one of the few people read the book and see in this right way. it's about the decentralizing of knowledge and i would agree one of the flaw of dodd-frank the attempt to just, if we just centralize risk and knowledge in one place, somehow it will

work. and [inaudible] it's not -- decide i appreciated the comment about various boards. people forget that enron, for instance was complying already with the [inaudible] requirements that would not have made a difference. i do what i ask. and i think it's help to feel give a little background. what lead you to pick the firms you did for the failure and success. >> this is sort of interesting. >> nice question. we started out, and i was looking all over for successful firms, and i remember asking about number of firms and sort of making preliminary contact and for one reason or another, they weren't relevant to what we were looking at. the commission was looking at a range of firms. it gave me opening. when we speer viewed fannie mae and did the deep dive going down through the ceo through people in the inside of the

organization, that gave me one firm. and then i -- we didn't have time for, we were -- we only had a year to finish our work. we were on a tight budget. but i insisted that we do some studies of freddie mac. let's find out the parallels. we interviewed a number of risk officers at freddie mac and the ceo and others. and it sort of built out -- when i sat back at the end, i looked and the one institution we didn't interview was tv bank in can did. and bbt as you pointed out. we didn't interview td bank. i started look the their financial statements. in you're they said we're loading up because the sub plim mortgages are great deal in america and they said we decided to get out of the american residential mortgage market in

'05. in '06 they said we have taken losses over $100 million. we are out in 2010 ed monday clark the ceo gives an interview and said we got out of our sub prime mortgages and they all wrote i was an idiot. i sort of collected as we went some comments or unfortunately off the record rather than on the record, i mean, in term's of alex's point the american can stay irrational longer and he has a marvelous twist on this longer than you can stay employed. i interviewed one risk officer of a major company, and she said to me, you know, i had two choices either i was going to be a pain in management's neck or i was going to be known as a risk officer at the firm that blew itself up. she left in '06 and the firm

createred in '08. it is really hard to be a risk officer, that's why i get back to the role of supervisors. cliff, who was a risk officer at the number of different organizations that failed, citi. country, fannie too. when he finally went to the university of maryland he was going get a medal for protecting the financial system. he basically says what a risk officer needs is their cover. if -- i'm not saying the risk officer is always right. you have to have the conversation to figure out to make a robust decision, and if the ceo doesn't want that, then as far as i'm concerned, the supervisorrings almost the only person left with enough clout to get it done. what i recommended to the fed, who knows what they're going to

do -- i'm used to my recommendations being heard. >> you and me both. >> what i recommended to the fed is they send the examers in to the institution and they say show us major company decisions you made over the last year and show us where you adjusted those decisions with input from the board, input from an engage management team, input from the risk officer, heaven for bid, input from the -- look for the reality rather than the formality. >> and i would emphasis it's an important factor in any institution. there was football looking at time quite near's phone blog. it was the same people. they look at it's interesting if we have president here at cato i

talk to commercial bankers and many say they have an impossible time trying to talk to geithner the influent investment banks were on the phone with them. you get to the group think situations. that's one of the problems. it's one of the problem the fed is stacked with economists and the board rather than having i did diversity viewpoints that challenges the conventional wisdom. i have a number of questions. i want to see questions from the audience first, i think we have one over here. please identify yourself and keep it in the form of a question. [laughter] >> mark. i hear from alex all the time. tom, i have purchased the book, and look forward to reading it. but -- and you and i had discussions about this in the past, it seems to me that you

feel that at least in the services sector that regulation can be made to work. and yet i'm not aware of any instances where it has worked. in any meaningful way, and i think the financial history not only recent but going back further in time is replete with examples of failed regulation. can you point to any situation at any time, anywhere in the world, where there has been successful financial services regulation particularly with regard to safety and soundness issues? i'm not aware of any. >> i don't want to get in to the discussion of canada versus the united states, there are probably a decent model. i want to flip it around, burt, i agree with you. what i struggled within the book was what would work? , i mean, people, for example, recommended breaking up banks. i don't think it's size of banks

that is important. i think it's a complexity of the institutions that makes them unmanageable as well. but in terms of reality, i just didn't see that happening in the near future. so what i was grappling with was how can we make regulation more intelligent? it's some optimal solution potentially, but if you're regulators are worried about improving the quality of decision-making? that's a force for greater not lesser market efficiency. and that's what i was struggling with with the proposed solution, that we had looked and tried , i mean, look where we're at. in the financial crisis, the retail market, because we have deposit ?urnz, insurance. we didn't have lines of people standing outside of banks trying to their money back. the panic and lines was electronic in the wholesale

market. because all of a sudden losses occurred. everybody on this happy bubble, and loss os curred and i don't know what is on my balance sheet for sure. i don't know what is on yours. i'm going to get my money back as fast as i can. one of the solutions that i see happening now is that with the large complex financial institutions government has said, okay, we can't afford that kind of panic again. and so now the whole market is going away from market discipline rather than towards it. it's that context where i'm trying to grapple with what's a reasonable solution you can convince these people to implement both leaders in the industry and in the government that might work. >> someone who chairs -- shares burt's skepticism. i think the most is the knowledge part. it got me thinking about traditionally we think about the real problem of too big to

fund. you'll be able to run your rival out of the market, create market share. i think it bricks another issue if the creditors, those who feel to lend to you feel like they have something at risk, they are going to exercise their voice when they talk to you you're going get the bondholder saying to the management, we don't think you're doing things correctly. in a too big to fail world, you really eliminated that information flow from creditors too management that i think actually makes for a dumber corporation. right here. >> my name is stephen short. he mention the citizens united and i'm wonder, i'm not talking about the legal right of corporations to contribute to the political process whether any analysis has been done as to the consequences of such involvement and whether that

made the situation worse? >> citizens united with, i believe was after '08. so it didn't have an effect on the crisis as such. it may well have -- it's campaigns and we're only in a campaign cycle being influenced by it. i think we're going have to wait until we're done the road a bit to get the implications in terms of practical results. but it is clear that the financial services industry had the large hand in writing the rules that we got in dodd-frank and one of my favorite examples, just if you want to em beliematic example is the csh -- we finally decided we need one group that is overseeing financial stability. what do we do? we created a council of 15 members and seek constituency has a irregularlator on the

couple as voting or non-voting member. that's not a way to run a railroad. and dodd-frank is filled with that. so we didn't see the effect of citizens united. ic we see the effects of constituency influence. >> there was a question here in front. microphone to the gentleman in front. >> yeah. i'm the ambassador of [inaudible] the form of chase banker and a wept through the credit school and worked for several banks. the one thing i thought was interesting discussion, the thing that i would like to point out that i don't believe you can regulate good decisions. i don't believe you can regulate greed. and what i found is this, is that you talk with the risk persons of the bank and the ceo or someone making the decision, i can assure you the ceo knows the risk he's taking.

but sometimes you -- people get boxed in to situations where they don't have choices. let me go one step further. i've been in a situation you have a result last year, you made x amount of money, and you had a very peculiar situation that created a situation. you have a -- [inaudible] do you think that the board or the shareholders take that in consideration? you have gone from this level of profit to level. guess what you're going from this level to that. well, that's where the things become problematic. what is going to happen to the ceo and everyone is going to filgd here and there. it will explode at some point because of the growth factor and the -- i've had one time a ceo of a largest processing company. and he comes and visit, i was chairman of a company, and he didn't ask to look at the

financial. he didn't even visit to the company. he sat down and made us an offer based on one thing. what are your sales? because the market had told him he need to get more market share. and so he just goes around gobbling up. these are things that, you know, the force i don't know what you call it greed or whatever. that's tough to regulate. >> i agree. one of my chapters is titled [inaudible] will it happen again? and that's a question. not an answer. >> the answer is yes. [laughter] i'm just trying to push it off a little bit and maybe mitigate some of the circumstanceses. you're absolutely right. there are all sorts of dynamics that make really hard to govern well, but for example, we interviewed chief risk office of wells fargo who had found unites that were operating not with the

particular fact that you talked about, but bisquely going for -- basically going for a little more returns than they deserved and of course, it's a red flag if somebody is simply going for market share. because there's no natural limit to going for market share. you always go for more. and they actually replaced a couple of heads of major units because they were concerned about that dynamic. that's a well-run company. now chase, before the crisis, was a well-run company. fortunately, jamie diamond had a -- so when there were serious problems in terms of risk-management and one worries there were human being russ more than anything else. after the crisis with the london office they could take the $5.8 billion hit without going in to the kind of problems that caused other companies to fail. but i agree with you. it's really not -- it's not

easy. >> it seems to extend related to too big to fail. a lot is driive by the equity holders which send to have different interest than the creditor. we take them off the table by saying you going get bailed out. before we get another question. i want to . >> can i make a comment. there's a pressure both in the question and the answer -- i think it's important to realize the people we call the shareholders or the equity holders. those individuals are in fact not shareholders or equity holders. they are hired managers of somebody else's money. they're managers. or they're union managers or [inaudible] managers or mutual fund managers. they themselves are agents running too to quarterly returns and liable to lose their job if

the market stays irrational. i don't think our discussion of the interplay between financial markets and financial firms has really understood that fact. >> i would 100% agree. i think a big driver that has not been examed is the substitutization is there are all sorts of governance that lead to the short termism. before we get to another question. i want to ask what sing a macroquestion. given part of the title of the book is fail or failure. i want to ask, we repeatedly see places like citi bank that we bailed out numerous times. the economist in we want to ask the question are we overoptimist to think that firms are going change their culture to one that doesn't display that knowledge or rely the firm has a bad

culture it will fail and the way we get rid of it is forms with good cultural take over market share and we short circuit that by not letting lots of firms bail when they should. what do you see the role of failure in this? >> failure is really important. the trouble is that when you got have financial panic as bernanke said, in david's book, and i the people we interviewed believed it we were about to go in to depression 2.07. they are going to bail out everybody. at that point failure falls back to the taxpayer and inefficiency in the financial system rather than shoe companies or something else. >> i guess i would say consistent maybe with the theme of the book, if you only talk to firms that look like they're going to fail, many of them will tell you, yes, the world will come to an end if you don't bail us out. >> and the issue of the wisdom

of what happened after the crisis we were trying to look at what lead to the crisis. in terms of city group, charles prince who was the ceo famously said he had a sense of humor, citi doesn't have one good culture. it has five or six good culture. it goes to what i was saying about complexity. particularly the firms, that grew by acquiring other firms end up with undigestible mass unless to build on your hayek use of knowledge, like jamie diamond, you slap of your organization and do a common information platform. at least you can see enterprise, what kind of positions you are taking. >> you also have the problem of the [inaudible] you have all the information being shaped by some

understanding of what the problem is and that's why, as you so nicely say in the book we have the problem of cognitive hurting. cognitive hurting by firms, by governments, by central banks, by anybody. we think about the problem in the same way with the same category. that's really a hard problem to i diversify. the nice problem . >> i think a question here in the front. get to the gentleman here. >> thank you. i'm [inaudible] correctly what you're arguing is that regulator who focusing less on the risk-management institutions of the bank but more the risk taking culture and the risk-management culture talking to whom and so on. the problem with that it's hard to understand what the culture

is or even to go in to regulate the things. it's hard to measure. you can't -- how do you -- what criteria would you nut plaits to assess risk-management culture. could you give a couple of examples how regulators could go to the bank and improve the culture and true to, yeah, prevent big fails. >> my personal takeoff point to start at the top and get the bank or the institution to say, oh, in the last year, here's a major decision. here's how we modify it based on input. you want to show people are willing to listen. herbert allison who was a treasury in a number of private sector positions before recommends for the board. he never recommended far regulator, that the board undertake sort of send question nears at people at different

level of the firm to try to get an understanding of their culture. and one of the best studies that i saw while at the commission was on the regulatorrers side. it was the federal reserve bank of new york that published a survey they did. it was anonymous that quoted automatic of their examers. and when you heard the culture of those examers, like be sure you don't do anything that gets blow trouble. don't rock the boat, you knew what the culture was about. you knew those aren't the people that can do more than check the boxes. so it's not easy. i think we have to start 0 done down the road. there are tools that one can apply. >> right here in the back. >> hi, vern mckinley. i want to move on to your one of

your specialty areas fannie and freddie which pops this the mind which talking about cultures. i mean, here we are four years later, they're just as big they were freddie slunk a tiny bit. fannie is about $3 trillion a few years back no plans on the table to definitely wind either one of them down. i know, in the '90s you proposed road maps to get them wound down. do you want to update that if possible. do you see any possible way they could be eased back in the private sector over six year, eight year, ten year period or is it kind of a loss cause? be when i spoke at cato in 1989 after coming out with my monograph, bill, who was the head of cato at the time, after the talk who we -- we were

talking and said how do we get rid of them? i said once they fail i'm sure you can coanything you want with them. i was wrong. [laughter] hopeless optimism. i don't have an answer because hidden in your question is a question of what the political process thinks about the 30-year fixed rate mortgage. if we were willing to say we don't care about the thirty-year fixed rate mortgage which is limp along-term instrument with a tail on it, at least, that can't exist in all phases of the credit cycle, then you come out with one answer about whether we need fannie, freddie on or anybody else. if the political process said we want a thirty-year fixed rate mortgage. what we have to look at then, i go back to my discussion with burt, we go to second best solutionings.

and there are some but in the thend one has to be solved on the very highest level. the way that 2008 law was written, only congress can repeal the charter of fannie mae and freddie mac. that turns it from a policy issue in to much more of a politics issue. >> you can impose loss on creditor within the frame work at law. to be one of the more characteristic of a gse. the perception that credit town protected. it's something that treasury could have done. i think they could have done. and certainly we would have, i think, in my opinion, . >> would you have done it? >> i would have. impose losses on creditors. absolutely. sphw. >> [inaudible] they can put in a receivership. >> yes. i covered that in the beginning. shareholders out the equation.

because until you take them out of the equation they are in the position where the government under law has stepped in to the position of the board and management to try to restore the institutions to financial health. what that means is that fhfa gets whip sawed with the demand we want to you to support national housing responsibility and the legal responsibility is to support the gse that means ticketer credit standards than other policy makers might want. in other words, the public-private mix that made the gse hard for people to deal with in the beginning is continuing to confound me. but i agree with you. i mean, they should be in receivership. at that point, you can make a policy decision on what you debt holders what happens to them or the mortgage backed security holders, but you can also begin

selling off assets and doing other things. >> girlfriend to the next question,ly say that the receivership famework for freddie and fannie put in place before the failure is in some ways is mirrors dodd-frank. if you believe the orderly resolution in dodd-frank prevents too big to fail. you need to explain why it didn't work for fedy and fannie. the woman here in front who has been patiently waiting. >> hi, ann stone. i was one of very few women in southeast united states that helped start and organize bank. went through the problems. we started at the height of the snl crisis. we were smart enough we had problems with the churl nirmt the bank that was causing concern to make profitable enough for bbt eventually bought it. it ended up being a good investment.

i wanted to ask a lot of speculation was done when financial meltdown happened. that a couple of things were -- [inaudible] to the drivers of the crisis. one was the effect of the gse on the primary mortgage market and the personality age of risk that went up from -- and the change of the rule fsa rule 157. i wondered hue change in that rule could be done and nobody saw that it was going deval -- deval -- how somebody could not see that. second part as female, of course, a lot of there would have been less of a crisis if more women in the financial market. give what i saw and the conclusion i reached in the -- book i diversity helps.

you have people from a multiplicity of perspectives. and you can -- huh? i would not want to betray any prejudice by saying what women do, but i think a diversity on the board elsewhere is really helpful in a lot of cases. but you always point counter example. there's a woman on the -- that took the hit $5.8 billion. it depend. market to market is really what we saw was that certain tools in the hands of the right managers are really good. that would apply to derivative. in the hands of the wrong people, really don't work. gold manuses mark to market and they to it every night. they almost went out of business in 1994, againen because of operations in the office. i don't know what it is whether

-- maybe the regulatory framework. it and they created a parallel structure to the train wheres they called controllers. every night the controller will market trairns market position to market. what that does is gives them and they roll it up to management. it gives them a really good view. much what's going on. the trouble is it can exacerbate your cycle. when you're in the bubble, which incidentally is when you need the risk-management, after wards everybody gets -- when you're in the bubble market to market says you're asset values are going up. everything is great. don't worry, be happy. and when you're in a crunch, all of a sudden. the values drop and you're done.

it's a tool and the right hands it's really wonderful. in the wrong hands it doesn't work at all. in the end, i don't know the answer, and would like to talk with somebody with more practical experience. that's how i learn is talking with people with different experiences, but you wonder if one shouldn't keep two different sets of books so that you can benefit the investor. and that was really the part of the loss in the law. it whole situation. the investors can get a better sense of the quality of an institution in this book. >> i will note i've been on the defense on this mark to market. ly note you have, in my understanding is a nonaccountant had the option whether you held something to maturity. or whether you held it in the trading book.

bank of america is maybe 15% market to market. it you take to only investment bank. and when you look how the products were built by the banks, they were built backyards. they were look at what should they put in order to get that.

[inaudible] [inaudible] efficient in order to be able to do things quickly more than what one can have in the agencies. plus, exactly how the [inaudible] work and exactly what they need to do in other [inaudible] they want to accept as much as public. that's what their job is. how do you look at this and think that is behave in the future and [inaudible] >> you have to. and i would to your add to the list the fact when a particular analyst was and understand things they could trouble their

salary by working for an investment bank to structure products for another ratings. it's a difficult situation to some extend when we look at moon any. you had a sense that a lot of these firms were cautionly investment banks when they were partnership. in a partnership you can lose everything. and then they tushed to share hold their own company and you had a sense with moodies that when they spun off from [inaudible] and went on their own, they picked up a lot of incentive to take risk and i have a chapter on the book on organization structure and how can shape risk taking. i'd like to go to the other side of the equation. there's a section in the book, and i would imply this to the regular regulators as well, to everybody board members and everybody. the power to simple questions. there are simple questions you,

when you ask them and pursue the answer you can learn something. in the late 2000s fannie mae took a hit, a large hit for an ordinary company. not for fannie mae. on manufacturing housing loans. and in 2003, the chief credit officer at fannie mae wrote an after action report saying one of the lessons is you can't trust the aaa rating because these we brought aa pieces on the mobile home loans and they creatorred on us. [laughter] if somebody asks question why aren't you doing due diligence in term of the content are cons tracks issues. a aaa of one kind may be

different if it has a dispersed amount ofs a sets behind iterer er versus in the end. the only answer is due diligence that investors fell down. lou in a wonderful quote said no one was defending the deal. you didn't have two side. you had sort of this prosperity that everybody thought would never end of all the must be flowing it from oversaws and investors were rushing to it put it race? and aa looks god if it's a sub prime aaa security. i can get a higher yield than prime mortgages and the aaa security. the simple question, risk and return are correlated. somebody to ask besides ed monday clark what's going on here. >> i think it was a good point.

a self-promotion i would edge younger tow look at august. how i thought they failed. >> i would like to thank the panelists. it's been a fascinating discussion. i got a lot out of the book. i would enjoy to take a look at it. i would like to welcome you upstairs for lunch. thank you. [applause] tell us what you think about our programming this weekend. you can tweet us at booktv, comment on facebook wall, or send us an e-mail. book, non-fiction books every weekend on c-span2. you're watching booktv on c-span2. and joinening now in the studio it malcom o'hagan the founder and chairman of the foundation of the american writers museum.

among other things. seriously it will be a place where people will come and engage with writers and writing in ways that they have never been to be do before. it will be the first national museum dedicated to celebrating our writers, and helping people understand the impact they have had on our culture, on our history, our daily lives. >> host: we spoke to you about two years ago when the concept was getting off the ground. what's the progress you've made mt. last two years. >> guest: let me thank you for having me back on peter, i appreciate that. i welcome the opportunity bring people up to date on the project. we made a lot of progress. i really judge that not by what we saw but what others say.

they are impressed. we have started all off we have pretty much established beyond a doubt it's a worthy endeavor. the concept is solid. we have very enthusiastic support. which is reflected in endorsement from leading people across the country. and your -- the view leers see these endorsement at our website. we have an execkive planning team in place. the national advisory council. we have created a literary council in dhoij help us there. that is will be the venue for the museum. we -- excuse me, i just completed the initial plan for the museum we have a business plan in place we have received grants from a number of foundations, private and public. including the grant for the national endowment for the

humanity that developed the plan. we have engaged up with of the leading museum experts to -- [inaudible] and many places meet that. washington, new york chicago has the added advantage of being central. it's a wonderful city. and most people when we indicate that chicago, they think that is actually a pretty god choice. there's other places that we would love to have it. everybody acknowledges that chicago makes a lot of sense. >> when do you see ground being

broken on a physical location? >> guest: we are business plans calls for a phase to development. and as you know, many museum start small and grow over time. start in one location and maybe move. and the more likely scenario for us is we will start in the existing location. and for example, it could be at the cultural center in chicago, which is a great venue at the old library across from me lem yum park. an ideal location. it has been an inkey pay -- incubator. one scenario we would be housed for a number of years while we develop the ultimate home for the museum. whether it's a stand alone building which we would love to have or housed with another institution or in another multipurpose complex. >> and mr. o'hagan, if your plan, in your development plan,

you have area of the museum divided by author-type. is that correct? >> guest: the -- our initial concept plan, which is post at website i would urge your viewers to go there so they can see the details. we will have when you enter the museum, as currently envisioned, you will find a large ink fountain. and it will be splashing letters on the ceiling and on the walls and they will swirl around to form words, the words will combine to form important sentences. the statements, titles of books or whatever. and that will immediately engage people with the word. and from there you will go to what we call a writers hall. it will have a series of -- that deal with different topics and the topic could be american quest, families american towns and in each of the area we will

have a very engaging interactive exhibit and will feature works that are appropriate for that particular topic. if it it's american quest it is start with lewis and clark and moby dick and follow jack on the road. we'll have a large map you'll be able to trace our path. youth l you'll be able to understand the context for the writers and the idea. how they develop them also what is significant about the particular work. how is shaped america and our thinking about who we are? we would have a series of special exhibit halls, obviously, very exciting. one for children and you'll hear lots of laugh steer and squeals of delight as they engage from the favorite character from the children book. we will have a poetry corner, and one way to that could play out, it could be a darkroom you enter and sit there and quite and you hear the poet's voice

and images of the context in which the poet or the poem has been set. so these the sort of ideas. we want to make it engaging and fun. and inspirational. >> what about non-fiction? >> absolutely it will feature non-fiction. and we are a country that is founded on the written words starting with the we hold these truths to be self-ease and the institution and propagated with the getties berg address and the great speeches of martin luther king and others. these are fundamentally important defining the country and who we are and inspiring

words. biographer -- play write and poet. they will be featured in the museum. who and how will be determined by people much more knowledgeable than i -- all of these things will be cure rated in time by creative people and knowledgeable people. >> malcom, what's your background? how did you get started on? >> i'm an engineer by training. i spent my career in business. i grew up and i had a love literature after retiring i had a chance to pursue my passion which is letture and i found which visiting my hometown the writer's museum was engage. it doesn't exist here. that's what got me, peter, down the path. and quickly found that people thought it was a worthy idea. the price if it -- and they were

surprised it doesn't exist already and encouraged us to go forward. it's a major project. this is a marathon. it's not sprint. in fact i'm wearing my marathon tie today. i have run a number of marathon. you say why am i doing this? i want to quit then the people along the way are cheer you on and that's what is happening with the project. right from the start people have been cheering me on. >> who are some of the people who have been cheering. >> we started with the literary community. the poetry foundation, the center for fiction in new york, the library of congress, the publicly rare in new york. all the major institutions in the chicago and presidents have endorsed it. the mayor very enthews yaysic idea. loves the idea. i got a nice endorsement from the governor of illinois. last week the endorse ment from david and chairman of the

national could i read this. i think it got to the -- he said in the country established as an idea exme candidated in written documents and embellished by generation by poet, novelist commemorating written word is self-evident. it describes people and what is celebrated described defines our values. and who wrote that? this was mr. leech. the chairman of the national endowment for the humidities. >> former congressman. >> from iowa city and one of the most respected members of congress. >> how much money do you project this project will cost? >> ultimately the current plan projects about $90. it will be developed in faces. the first buncht is $35

million. that's to develop the initial space it will be about 30,000 square feet. phase two -- another $15 million and phase three another $15 million and about $20 million for the endowment to make sure that the museum is sustainable. that's the big issue today with museum. they start with a bank and then you can go without a whimper. and so we are determined that the museum is going to be around for a very long time. and part of the planning and business plan has to ensure that. >> 0,000 square feet. can you give us a come rabble space? >> the -- well, the 30,000 square feet. half of that is exhibit space and half is, you know, for the shop, for the social areas and so on. i would say that it's exrabl

comparable the international spy museum here. which is one of the model. it's a fun engaging place for people to go to. and so that would probably be a couple of examples. >> it's october 2012, we're taping this interview, where are you in the process? right now. we have just about all of the foundation document in place with the business plan, the concept plan, by the end of year, we could have site analysis completed. by the end of the year we will have the fundraising strategy in place. and we will be ready to move forward with the next phase which, of course, the fundraising, starting to develop the exhibit ideas in more concrete terms and i should have mentioned that actually at our website we have our first online

exhibit and very much encourage the viewers to go there. it was inspired by the fact we world leaders leading in the united states in the spring and we thought it would be interesting to look at what american writers have influenced and surprise. and basically three parts to the exhibit. so that is one. look at what is influenced foreign leader. we have 38 of the leading authors we asked them what american works they would recommend to american leaders to help them better understand america. different recommendations and why. we asked them what foreign authors have influenced their work. we have also asked them how were they originally inspired to write. you have many people. a lot of wonderful writers are featured in that. i urge your viewers to check out and also people that go to the website can make their